A wave of selling has brought US Treasury yields closer to their March highs, confirming predictions that a long summer rally would fade amid stubborn inflation and an imminent shift to tighter monetary policies.
Yields, which rise when bond prices fall, have been on an upward path since the Federal Reserve’s September 21-22 policy meeting. On Friday, a disappointing employment report in September briefly blocked the climb. But the 10-year yield closed the session at 1.604%, its highest closing level since June.
Although brutal, the rise was long overdue by those on Wall Street who spent the summer claiming yields were below what they should be. Investors pay close attention to Treasury yields in part because they serve as a benchmark for interest rates across the economy. They are also an important economic indicator, reflecting expectations of the level of interest rates set by the Fed, themselves dictated by growth and inflation forecasts.
Part of the rally that lowered the 10-year rate from its recent peak of 1.749% in March appears to reflect lower growth expectations. But much of the buying hit analysts as either tactical or opportunistic, and was due to end in the fall as trading activity picked up and the Fed moved closer to the first stage of its tightening policy: l ‘act of cutting its monthly bond buying program by $ 120 billion. .
Roughly in line with expectations, the Fed at its September meeting signaled strongly that it could start cutting its bond purchases as early as November. Officials have also indicated that they could raise short-term interest rates above their current near-zero level as early as next year.
Over the following weeks, investors responded by selling all types of Treasuries, causing ripples in the markets, including dollar gains and tech stocks declines.
Yields rose on short-term bonds, which are particularly sensitive to the rate outlook set by the Fed. But they also raised longer-term bonds, suggesting investors believe the Fed will be able to keep raising rates even after its initial move.
Other factors helped fuel the sell-off, analysts said. A drop in new Covid-19 cases has rekindled hopes that more workers could soon return to their offices, boosting the economy. A deal in Congress to extend the US debt limit until December removed a short-term economic threat. At the same time, persistent supply shortages, rising energy prices and strong consumer spending have pushed up inflation expectations.
The prospect of a decline is one of the main reasons yields have climbed, but inflation is another, which “may have repercussions,” said Larry Milstein, head of government and trading agencies at RW Pressprich & Co.
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Friday’s employment data did little to change those calculations. Prior to the report, some analysts thought the Fed might rethink its cut schedule if the economy created fewer than 200,000 jobs in September. It turned out that the real job gains were just below this threshold. But the upward revisions of the previous months still left traders confident the Fed would stick to its plans.
Many investors and analysts believe Treasury yields can continue to rise from there. Some have long predicted that the 10-year yield would end the year at 2%, sticking to that forecast even though it fell as low as 1.173% in August.
Others, however, warn that investors may underestimate economic risks going forward, including the possibility that rising energy costs and supply constraints will begin to weigh on growth.
“Look at the trends of the past two months, and maybe the markets’ vision for 2022 makes sense,” Jim Vogel, interest rate strategist at FHN Financial, wrote in a Friday note to clients. “Look at the next four months, and the chances of a sustained GDP recovery have already started to diminish. “
Write to Sam Goldfarb at [email protected]
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